European Low Cost Airline
By the use of a case study, this paper will explain why there was the need ofliberalization of airline markets so as to lower the cost of airline budgets that have currently lead to its development and prosperity. It will in details present the various impacts of the development of European airlines due to lowered costs to airline companies, market destination, and the rate of consumer travel. A final prediction of the future of lowered cost model is then presented.
Lowered cost of airlines has continued to influence air service providers and markets as they are under pressure of business competition. The model of lowering the cost of airlines has motivated companies to negotiate on contracts which aim at significantly reducing revenues from aeronautical. This has made airlines to compensate through seeking commercial revenues with the increased passengers on things like food, drinks, passenger booking, baggage and others. Low cost airline or carrier refers to those airlines which charge lower cost of operation than its competitors. The charges for air tickets are charged lowly, as well as other limited services. Low cost carriers only refer to those which offer full airline services and long flights. They should therefore not be confused with those that operate on short distanced flights without any services.The low cost carrier in Europe is a trend that was started in the 2000s and has already left a mark in its airline industry. This model has been successful and currently continuing to grow and extend its network. As other carries are getting it to the market, it has led to increased competition. A probable prediction of this market entrance may lead to merging of the low cost carriers or they may participate in alliance as survival strategies to survive the clashing of airlines.
The significance of liberalization of the airline markets in relation to lowering of costs
Liberalization of European airlines was a regulation ruled by the government in the 1990’s. Liberation can also mean deregulation which is process whereby the state controlled industry frees itself from controlling the prizes and regulation of market entry and exit. With liberation of airline companies, it meant that there was free entry and exit into the company which is a freedom on capacity, operation, fares and extremely high competition.Prior to liberation there were few companies that were shielded from competition. This meant the lack of choice for travelers and they therefore had to pay highly due to the standard traveling tickets prize. Liberalization brought about the changes which were not present in the traditional airline. There was freedom of European carriers to choose their schedule routes and fares for they were minimally interfered by the government. This new opportunity meant the birth of budget airlines and an airline sector that charged low costs.This chance which resulted from airline liberation meant may participants and high capacity of carrier companies. The Increased number of service providers meant high competition and high competition means lowered cost.
There has been harmonization of aviation industry landscape according to the provisions of EU (Intervistas, 2009). Liberation has impacted on international market for the benefit of the wider European economy and to the air passengers. Liberation brought about a great increase in competition for routes and subsequent development of new routes that were not in existence before. This has led to lowered discount fares of 34% in real terms (Liasidaou, 2004).Liberation of EU airline market has lead to a double growth rate of EU air traffic. Other studies have furthermore demonstrated a link between increased employment, air traffic and Gross Domestic Product (GDP). The recent study indicated that with every ten percent increase of air services operating internationally, there is a 0.07% increase in the G.DP which equates to millions of dollars increment (Mason, 2001)The ownership and control of airlines as a result of liberalizing has great benefits to the economy and passengers. Airlines have gained access to cheaper sources of capital which are new and as a result enabled them to draw from large pool of well talented managers thus leading to efficiency through mergers and consolidation. Liberalization, therefore leads to lower fares and increase air services that has resulted to a greatly added volume of traffic movement and increased employment and economic growth.
The main impacts of the growth of budget airlines in Europe
The consumers have greatly benefited from the newly developed budget airlines and the LFAs. This has mainly rooted from then various destinations they can now travel to; at lowered fare cost. They also have variety of service providers to choose from for their travel within Europe. Passengers have enormously increased after these changes for most can now afford to travel by air which in previous years was viewed as only for the business class and the rich in the society. The development has automatically increased numbers of passengers which has in the long term brought great savings to budget travel lines a like the Easy jet and Ryanair. It has also benefited many businesses across Europe like Hotels, tourism industries s and Motels (Francis, Fidato, & Humphreys 2003)Customers have increased consumer choice from a variety of low cost carriers. The numbers of airlines has significantly increased from only seventy seven in 1992 to one hundred and thirty nine in 2000. By now the number is likely to have doubled. The new coming privately owned air carriers are adopting the low cost model in their operation for example the Aer Lingus. Other airline companies have set up fare subsidies such as KLM’s Transavia/Basdiqair, SAS’s Snowflakes and BA’s go after inuring easy jet, BMI’s bimbaby and Lufthansa’s Gewrmanwings. They are the key players in airlines service providers and they compete to offer the best service possible to travelers. They come up with new routes different from their competitors so as to increase competitive advantage. They also offer high frequencies at lowered cost which provides travelers with a great choice.The high number of these companies enables them to provide direct route for customer convince from point to point. However traditional European air carriers like Air France, Lufthansa and British airways have adopted connecting service called the (Hub-and-a-spoke). Hub-and-a spoke is a model which offers to carry travelers through their hubs. They have abandoned direct service which has lead to cutbacks of passengers, for example the case of Atarsbough Airport which Air France terminated ten direct services from the airport.
There has been the increase of employment for example the Cologne/Bonn airport in 2303030 indirectly and directly employed people into an approximate of 1,766 jobs (Die Regionalwitrscahaftlichen 2004). This increase can be represented in the figure below.Direct employment at the airports depends on passengers who would require more shops, banks, car rentals, and restaurants. The Frankfurt Hahn airport has witnessed an unprecedented growth of traffic due to the presence of low fares in it airline.LFA, direct services on the contrary have succeeded in these regional airports since they offer direct service. They have taken up abandoned services by network carriers and opened new routes leading to high passenger growth. Air Berlin first scheduled its departures from various airports in Germany to destinations around the Mediterranean Sea and Mallorca which is densely populated area by tourists. From Mallorca it developed new routes and took up the abandoned routes in September 2005. Air Baltic has been expanding its routes which its intensification happened in 2004. The low cost air carrier expanded its routes to West Europe with newer routes in the Netherlands to Belgium. Ryanair as the original type of low cost airs carrier, LCC, had its central airport initially in Ireland and in England. It later expanded to the rest of Europe in 1996. By 1998, it had covered various tourists destination like Sweden, Norway, Spain and Italy. New routes were created to East Europe and towards Spain (Dombey, Done, Felsted, Madelaine, 2002).In September 2005, Malmo Aviation as a LCC type was initially restricted to Sweden but it later developed international flight towards Antwerp, Belgium (Barrett, 2000)
Effects of deregulation of EU airspace
The structure and industry of the European air carriers has been substantially affected by the deregulation of the airs space by the EU. This is the shift towards budgets airlines for more routes. Airline carriers like Ryanair and East jet are currently booming in the industry as compared to traditional airlines like the BA and Aer Lingus. They are the traditional airlines which have almost privatized. Others have suffered due to the rapid high oil prices in early 2008 for example the Italy’s air carrier the Alitalia. Basically the total numbers of airline that are abased in EU and offer scheduled services have significantly changed since1992 (Doganis, 1992). There is a great increase in their numbers but due to the liberation of EU airspace there has been constant entry and exits into the industry. For example by the end of 1993 just over a half were still operating at the end of that year under their code and scheduled routes. And in early 2000, only sixty four were still flying as compared to a total of 144 at start up in previous years. This shift was attributed to withdrawals or franchising of the airlines. The lowering of barriers through liberalization spurred the growth of more privately owned air carriers on domestic routes and maximally competed against each other.The thirteen national airlines have managed to remain in the market though they are members of global alliances or part of this principle. This is with the exception of Sabena. They have survived because of the government restriction of control and owned for they form then backbone of external relations with countries outside European areas thorough bilateral relations. There has been a strong growth on the numbers of intern-EU routes which have well scheduled international routes that have increased by almost 75%. The number of domestic routes served has also increased. Most air service providers have left the industry due to predatory pricing and anticompetitive mergers
The sustainability of the low cost model in the long term
The sustainability of the low cost model in the long term is not a surety because more and more new air carriers are joining the high capacity of air service providers leading to increased competition. It is likely that these companies will merge to avoid collisions and overlap of their services. They may also participate in alliance as survival strategies to survive the clashing of airlines.The notion of success may not be in line with consumer satisfaction and welfare. Successes can only be viewed with long term duration characterized by customer satisfaction and gratification. This is because the market is highly competitive as they are scheduled to offer services. The fact that the air service providers have to have a well developed , secure airplanes, well qualified personnel and the full crew, supplies on board, and fuel ; in addition to the ground staff individual responsible for baggage handling , boarding, ticketing and booking and other services are to be provided at a de factor fixed prize. This price doesn’t take into consideration as to whether or not the flight is making a hundred percent load factor or a zero percent load factor the cost just has to be borne. Also to make matters worse the service to be provided is budgeted months in advance making it to be difficult to know the actual cost. Therefore the low cost model is a matter of commercial risk. Insurance covers are therefore essential in this model (Aer, 2009)
The success of European Liberalization of the air transport industry is mainly because of the challenges that were present in traditional control of airlines and it is also because of the need to pursue new business models that offer high competition as compared to the traditionally controlled airlines. The low cost model has greatly influenced different economic sectors as well an as the consumers. The consumers have enjoyed lowered cost of air ticket fare with a wide verity of air carriers to choose from. The secondary and regional airports have benefited from the large numbers of passengers. There is also great employment to the wider community, development of new businesses and developed tourism. Currently the members of ELFAA have been working with EU institutions and state members in ensuring these benefits are made into long term policies that will ensure more lowered prices, continued competition and a wide consumer choice.
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